Would-be homebuyers are stuck on the fence

April 19, 2014|Mary Ellen Podmolik | The Homefront

New lending rules, fluctuating mortgage interest rates and slowly rising home prices haven't dampened enthusiasm for home purchases, but the combination is prompting a question from consumers to lenders.

Do I qualify?

"It's a different environment for the consumer than the last time we were in a robust purchase market," said Joseph Tunk, BMO Harris Bank's director of mortgage sales for Illinois. "The last time, they went to a real estate agent first and looked at homes. (This time), they want to talk to us first. There's a lot of curiosity, even by the people who've been through it before. They aren't quite sure how all the changes impact them."

That curiosity and concern revolve around stringent loan requirements that took effect in January as part of the Dodd-Frank Wall Street reform package. It also has to do with new costs tied to Federal Housing Administration-backed loans, mortgage interest rates that economists expect to keep inching higher and recovering home prices. All of it is affecting affordability.

About 80 percent of lenders who participated in a recent survey by the American Bankers Association said they expect the new regulations to measurably reduce lending.

Separately, an analysis this month by Redfin, looking at home list prices and salaries, found that a Chicago-area household with two middle-class incomes could afford almost half the homes listed for sale locally. Nationally, 41 percent of homes are considered affordable for a dual-earning, middle-income family.

While affordability is a growing issue, potential buyers need to keep in mind that when affordability was unusually high a few years ago, it was because low home prices were accompanied by historically low mortgage rates. The rise in rates and prices is causing some urgency on the part of many buyers, but according to Trulia chief economist Jed Kolko, the answer to the question of loan qualification will be a definitive no for some consumers.

First-time buyers are expected to continue to have difficulty participating in the recovery.

"Young people had a particularly bad recession, and first-time buyers tend to be younger," Kolko said. "Right now the recovery for young people is moving out of their parents' homes or a roommate situation into their own rental but not becoming first-time homebuyers. It takes time after a recession for young people to rebuild their economic lives. You don't get a job one day and buy a home the next."

Saving the money for a down payment remains the biggest obstacle for people who haven't bought before, Kolko said.

For some people who already own, there is a different set of obstacles prohibiting them from qualifying to participate in the housing recovery.

Urban Partnership Bank started offering home loans in January, and almost all of the 100 or so inquiries it received were for mortgage refinancings. Only five of those inquiries resulted in mortgage applications, and all were denied because of problems with the borrowers' credit scores.

Levoi Brown, Urban's chief banking officer, sees the bank's experience as a microcosm of what is going on in the broader economy, and he's not encouraged.

"Due to the sheer trauma, the guidelines by which anyone will lend are really, really stringent," Brown said.

"A lot of folks will not qualify for homeownership. It's hard to get some traction."

Higher by the lake. Owners of single-family homes in Lake County pay the highest average property taxes in Illinois, but it is homeowners 40 miles southwest of Chicago whose property taxes are the highest in relation to their home values.

In Lake County, homeowners in 2012 paid an average of $8,521 in annual property taxes, about 3.4 percent of home values, according to an analysis by Zillow. That compared with an average tax bill of $6,337 in Kendall County, but those taxes translated to 3.6 percent of home values.

Overall, the average property taxes paid in Chicago-area counties ranged from slightly less than $5,000 to Lake County's high. Still, the area looks like a bargain compared with some other parts of the nation, particularly along the East Coast. Taking the title for the highest average property taxes was Westchester County, N.Y., where the annual bill averaged $14,829.